Aozora Re cat bond down to one JPY tranche, price guidance lowered

19th May 2014 - Author: Artemis

The Aozora Re Ltd. (Series 2014-1) catastrophe bond transaction, which sees Japanese insurer Sompo Japan Nipponkoa (SJNK) Insurance seeking reinsurance cover for Japanese typhoon losses, has been cut down to a single tranche issue while pricing has dropped. When we first covered the Aozora Re cat bond last week the expectation was that two tranches of notes would be issued, one USD denominated, the other in JPY, both seeking to secure the sponsor a three-year source of fully-collateralized reinsurance protection against qualifying Japanese typhoon losses, on an indemnity and per-occurrence basis.

Sources tell Artemis today that the cat bond has been cut down to a single tranche and that only the Japanese Yen denominated tranche will be issued.

The Aozora Re cat bond had been targeting $100m or greater of cover but Artemis understands that the deal is now said to be JPY 10 billion, which is just slightly under the $100m, meaning that the sponsor will likely receive the amount of cover it had been seeking.

It’s interesting that it is the JPY denominated Class B tranche of notes which will be issued. It’s now quite unusual to see cat bonds denominated in anything other than USD, even Euro bonds have become fewer and further between in recent years. A JPY cat bond note, however, may appeal to Japanese investors or as a type of currency hedge for other investors.

The Class B tranche has the same risk of attachment as the previously proposed Class A, so the sponsors are effectively receiving the same protection from the cat bond, just through a JPY tranche of notes instead.

The Class B notes were launched with price guidance of 2.3% to 2.7%, which had been pitched 0.05% higher than the Class A notes despite having the same risk level. At the latest price guidance today Artemis understands that the range marketed has dropped down to 2% to 2.25%.

At that coupon level this would be the lowest priced Japan typhoon risk in the catastrophe bond markets history. However it’s worth noting that this is also one of the most remote risk tranches of Japan typhoon cat bond notes, if not perhaps the most remote risk, ever seen.